LONDON (Reuters) - When gold reached dizzying heights
above $800 a troy ounce in recent weeks, it cast a spotlight on a ritual
that has taken place in London for the past 88 years.

Twice a day, representatives of five banks pick
up the phone to trade physical gold and arrive at the London "fixing" price,
which then becomes a benchmark for gold around the world.

As the clock in the vast Barclays Capital trading
room in London ticks towards 3 p.m., attention turns to Marc Booker, the
bank's head of spot gold trading.

Booker joins a conference call with the four other
banks who take part in the fixing. The chairman, from Deutsche Bank, suggests
an opening price and Booker relays it to his trading room and customers.
Booker and the other participants say whether they are buyers or sellers
at that price, and the chairman adjusts the price until the buyers and
sellers are in balance.

It usually takes between five and 15 minutes to
fix the price, longer when the market is volatile.

"The mechanism is efficient and it is a benchmark
which has continued to function through all types of market stress," Martyn
Whitehead, director of commodity sales at Barclays Capital, said as Booker
traded.

The fixing price has gained greater significance
as gold prices have jumped more than 30 percent in 3 months and doubled
in 3 years, with a wider audience becoming interested in the price and
the volume of spot gold trading has jumped..

It reflects the price of gold in the wider spot
market and is used around the world by producers, investors and central
banks as a benchmark for pricing a variety of transactions. Refiners use
the fix to settle their contracts.

When fixing started on Sept 12, 1919, the first
price was $20.67 a troy ounce. The highest fixing of the recent gold rally
was on November 7, when it fixed at $841.75 an ounce in the morning session,
less than $10 below its historic high of $850, fixed on January 21, 1980.

In addition to Barclays and Deutsche Bank, the
other banks who take part in the fixing are HSBC Bank, Societe Generale
and Bank of Nova Scotia's bullion division, Scotia Mocatta.

Until about three years ago, the gold fixings took
place at the premises of N.M. Rothschild and Sons Ltd., with each bank
sending a representative who would remain in contact with his dealing room
by telephone. When Rothschild moved out of the commodities business, it
was replaced at the fixing by Barclays.

In those days, each representative had a small
British flag that they raised after receiving any change from their dealing
room. As long as any flag was raised, the chairman could not declare the
price as fixed. Now they say "flag up" or "flag down" depending on whether
they agree to the fixing price.

London developed as a gold centre in the second
half of the 19th Century, when it became the point through which gold from
the mines of California, South Africa and Australia was refined and sold.

Its history as a hub for trading in gold bullion
goes back even further, to the formation of the oldest original member
of the market, Mocatta and Goldsmid, in 1684.

These days, investment funds are taking keen interest
in physical gold, with about $13 billion in trades passing through London's
clearing system each day. To avoid cost and security risks, bullion is
not usually physically moved and deals are cleared through paper transfers.

On November 7, the same day the gold fixing price
reached its recent high, spot gold hit a 28-year high of $845.40, less
than $5 away from its record high of $850, spurred by a lifetime low dollar
and historic high oil.

During the recent rally, jewelers and other gold
users stayed on the sideline, watching the bull run, while individuals
around the world sold old ornaments and gold bars to take advantage of
high prices.

Small investors were looking at coins and bars,
not wishing to miss the bus.

The wider media coverage of high prices also attracted
investments into exchange traded funds (ETFs), which allow people to buy
the metal on a stock exchange without taking physical delivery of the metal.

Gold held in U.S.-listed StreetTRACKS Gold Shares,
the world's largest gold-backed ETF, rose to a record high of 599.50 tonnes
in early November.

"We continue to see a huge amount of retail inflows.
They are not generally the first to the party and they are generally not
the first to leave either," said Stuart Thomas, managing director of World
Gold Services, sponsor of StreetTRACKS.